Make sure you understand your right to a financial reset.
For many Americans who struggle with debt, bankruptcy is the way out. Unfortunately, a lot of people who could benefit from bankruptcy may be held back by certain myths and misconceptions about the process. Our bankruptcy attorneys have extensive experience guiding South Carolina debtors through the process, and we clear up these misconceptions every day. Here are five of the most common bankruptcy myths and what you need to know.
Myth #1: Bankruptcy will ruin your credit forever
While bankruptcy does affect your credit score, that damage is far from permanent. As we've written before, most of our clients see their credit scores get back into the fair credit range (580-669) within a year or two of filing, which is good enough to qualify for some types of mortgages and most types of loans. For some of our clients, that's already an improvement over where they were before bankruptcy.
Bankruptcy does remain on your credit report for seven to 10 years after you file, which means you'll most likely have to wait quite a while before getting to excellent credit. However, you have to look at this in context; if the alternative is to keep your overwhelming debt, that is going to continue to hurt your credit score as well.
Ultimately, bankruptcy doesn't ruin your credit; delinquent debt does. And if you're struggling, then bankruptcy can put you on the path to improving your credit in the medium to long term.
Myth #2: You'll lose all your possessions in bankruptcy
While Chapter 7 bankruptcy is called "liquidation bankruptcy," most people who file Chapter 7 don't actually have to liquidate any property. You can claim exemptions for the equity in your house, your car, and other personal belongings; in about 95 percent of Chapter 7 cases, those exemptions cover everything of value the debtor owns. And even if something is left over after those exemptions, it's often not worth the bankruptcy trustee's time to sell it.
If you are in a position where you would have to sell off significant assets in Chapter 7, then we may advise you to file Chapter 13 instead, which creates a payment plan for your debts instead of discharging them immediately. Either way, it's usually possible to obtain a financial reset without losing your possessions.
Myth #3: If you're married, both spouses have to file for bankruptcy
Married people have the option of filing for bankruptcy jointly or alone. Which option makes the most sense depends on the situation. If one spouse has a lot of debt solely in their name, then it may make sense to file for bankruptcy individually. However, if you have joint debt, then filing individually will make your spouse responsible for those debts, so it may make more sense to file jointly. A bankruptcy attorney can advise which option makes the most sense for you.
Myth #4: Bankruptcy is a license to go on a spending spree
While Chapter 7 bankruptcy does allow you to wipe out credit card debt, the bankruptcy courts are highly alert to the possibility that some people may try to abuse the system. If you make a bunch of non-essential purchases on credit in the 90 days prior to bankruptcy, then you may be charged with bankruptcy fraud — that is to say, borrowing money with no intention to repay.
The vast majority of bankruptcy filers are hardworking people in bad situations for reasons largely beyond their control: medical debt, involuntary long-term unemployment, divorce, predatory lending practices, and honest mistakes. The bankruptcy system is a way out of those bad situations, not a blank check.
Myth #5: You don't need a bankruptcy lawyer
As with any legal matter, you are allowed to represent yourself in bankruptcy court (this is called pro se), but it's not a good idea. Your bankruptcy filing is far less likely to be successful if you don't have an attorney.
One study, conducted by the U.S. Bankruptcy Court with the highest percentage of pro se filings, found that less than half of Chapter 7 filers who didn't have an attorney received a discharge — so, for the majority of those filers, the entire bankruptcy was a waste of time and money that did nothing to eliminate their debt. In the same time period, well over 90% of those who had an attorney had their debts discharged. And if you're filing for Chapter 13, which is a longer and more complex process than Chapter 7, your odds of reaching discharge without an attorney are even lower.
When it comes to your financial future, you can't afford to take that risk. If you're dealing with overwhelming debt and considering filing for bankruptcy, get a free consultation with a bankruptcy lawyer at Benjamin R. Matthews & Associates. We proudly serve clients throughout South Carolina.